The arbitration restrictions contained in Executive Order 13673, Fair Pay and Safe Workplaces (EO 13673), have been largely overshadowed by other parts of the so-called “contractor blacklisting” rules. Nonetheless, for those federal contractors that have adopted or are considering adopting an employee arbitration program, the arbitration restrictions in EO 13673 are just as significant-and more imminent. On August 24, 2016, the White House announced the release of the final blacklisting rules, along with a gradual phase-in schedule that starts on October 25, 2016. While the final rules will not be in full effect for the next couple of years, the arbitration restrictions contained therein are set to take effect in just a few weeks. Between now and October 25, contractors that want to retain existing arbitration programs or implement new arbitration programs need to evaluate new limitations imposed by the final rules. At a more fundamental level, contractors should consider using these limitations as an opportunity to reexamine their arbitration programs more broadly in light of other recent legal developments affecting arbitration agreements and class action waivers.

Which Contracts and Contractors Will Be Affected by the Arbitration Restrictions?

The arbitration restrictions are incorporated in Federal Acquisition Regulation (FAR) clause, § 52.222-61, titled “Arbitration of Contractor Employee Claims.” As of October 25, contracting agencies will have to include this clause in all federal contract solicitations having an estimated value of $1 million or more, with the exception of contracts for “commercial items” (as defined in FAR § 2.101(b)). The clause will be included in prime contracts resulting from these solicitations and will flow down to lower tiers of subcontracts that exceed $1 million, except for subcontracts for commercial items.

The fact that the arbitration restrictions do not apply to prime contracts for commercial items is unique among the provisions of the final rules. Prime contractors are not afforded a commercial item exception in connection with either the paycheck transparency provisions or the requirement to disclose labor law violations.

How Do the Arbitration Restrictions Affect Arbitration Agreements?

Section 52.222-61 requires a contractor to agree that “the decision to arbitrate claims arising under Title VII of the Civil Rights Act of 1964, or any tort related to or arising out of sexual assault or harassment shall only be made with the voluntary consent of employees or independent contractors after such disputes arise.” The final rules confirm that the restrictions apply to the full range of claims “arising under” Title VII, i.e., Title VII claims of discrimination or harassment based on race, color, religion, national origin, or sex and to any retaliation claims brought under Title VII, not just Title VII claims related to sexual assault or harassment.

Which Employees Are Covered by the Arbitration Restrictions?

The arbitration restrictions apply to all employees and independent contractors of a contractor that holds a covered contract or subcontract, not just the employees and independent contractors actually working on the contract or subcontract at issue, subject to only two exceptions.

The first exception applies to employees covered by a collective bargaining agreement (CBA) between a contractor and a labor organization representing its employees. Due to the CBA exception, contractors will not have to alter any CBA clauses, side letters, or other arrangements compelling union-represented employees to arbitrate Title VII claims or sexual assault/harassment torts and will remain free to institute these requirements as to employees covered by a CBA in the future, subject, of course, to the contractor’s duty to bargain.

The second exception applies to “employees or independent contractors who entered into a valid contract to arbitrate prior to the Contractor bidding on a contract containing this clause.” This exception-the “grandfather exception”-does not apply to arbitration agreements in which “the contractor is permitted to change the terms of the contract with the employee or independent contractor.” Also, it should be noted that the grandfather exception will cease to apply to an existing arbitration agreement if it is renewed or renegotiated after the arbitration restrictions take effect. While the conservative approach would be to implement any needed modifications to an arbitration program prior to October 25 (i.e., the effective date of the arbitration restrictions), a literal reading of the grandfather exception suggests such changes can be made at any time before a bid actually is submitted on a covered contract.

What Options Do Contractors Have to Preserve Existing Arbitration Agreements?

Contractors that want to take advantage of the grandfather exception should review their arbitration programs to flag any language reserving the right to modify their agreements. For the grandfather exception to apply, contractors must eliminate the effect of such language. The clearest way to accomplish this is to redistribute an amended version of the arbitration agreement without the offending language for acceptance by employees and independent contractors who agreed to the previous version.

Alternatively, rather than incur this administrative burden and the ensuing risk that an employee or independent contractor who previously agreed to an arbitration agreement may reject the revised agreement (thereby creating some ambiguity as to whether an agreement to arbitrate remains in place), contractors may consider affirmatively and publicly disclaiming any provisions in the agreement containing the right to modify the agreement, without redistributing a revised agreement and seeking agreement therewith. The disclaimer approach may be more attractive particularly with respect to former employees who agreed to the program while they were employed. Of course, such a disclaimer may be challenged as insufficient to trigger application of the grandfather exception.

Before taking these steps, contractors should determine whether they are subject to the “Franken Amendment” provision of the Defense Federal Acquisition Regulation Supplement (DFARS). This provision mirrors the arbitration restrictions contained in the final rules and was instituted following an amendment to the 2010 Defense Appropriations Act by U.S. Senator Al Franken. Similar to the final rules, the Franken Amendment bars defense contractors from enforcing or entering into pre-dispute arbitration agreements requiring employees to arbitrate claims arising under Title VII or tort claims related to sexual harassment or assault. Since 2010, this proscription has applied to contracts of $1 million or more that are funded by defense appropriations, with the exception of contracts for commercial items (as defined in FAR § 2.101(b)). Consequently, the grandfather exception would be of no benefit to defense contractors already subject to these restrictions.

What Arbitration Options Do Contractors Have for Non-Grandfathered Populations?

With respect to non-CBA employees or independent contractors who either are not covered by the grandfather exception or are hired after the date required for grandfathered agreements, arbitration agreements can no longer cover Title VII claims or sexual assault/harassment torts. Contractors have multiple options to consider, depending on their appetite for risk. One option is to rely on an arbitration agreement’s general statement that it does not apply to any claims that by law are not subject to arbitration and argue such a general statement applies to Title VII and sexual assault/harassment tort claims implicated by EO 13673. A general statement such as this is more likely to suffice if the agreement does not otherwise purport to cover Title VII or sexual assault/harassment torts. Alternatively, the arbitration agreement can be revised to exclude Title VII and covered tort claims specifically, i.e., define them as “excluded claims.” A third option is to frame such claims as “voluntary” or “optional” claims that would be covered under the employer’s arbitration program if the employee elects to submit them to arbitration after the claims have arisen. A fourth option is a hybrid approach, requiring employees asserting Title VII or sexual assault/harassment torts to exhaust pre-arbitration phases of a dispute resolution process (management appeal panel, mediation, etc.) but not mandating that they proceed to arbitration unless the employee agrees to do so, in writing, after the dispute has arisen. Other, perhaps more drastic, options include converting an entire arbitration program to a “voluntary” program, eliminating the arbitration step from a dispute resolution program, and dispensing with the program altogether.

By carving out Title VII and sexual assault/harassment tort claims, EO 13673 puts a hole in mandatory arbitration programs. Some contractors may see the unavailability of pre-dispute arbitration agreements for such claims as a tipping point that leads them to walk away from their arbitration programs altogether. Others may consider wage and hour or other claims as the primary motivation for having an arbitration program, particularly if a class action waiver is viable, and may choose to maintain their programs while modifying them to comply with EO 13673. Factors to consider in this analysis include:

Virtually all claims other than Title VII and sexual assault/harassment tort claims are still susceptible to coverage under a pre-dispute arbitration program.

Pre-dispute arbitration agreements are not prohibited as to claims of discrimination under state or local laws, which typically do not contain caps on damages and tend to be favored by plaintiffs’ lawyers who prefer to be in state court.

Nothing in EO 13673 or the final rules prevents a contractor from using a class action waiver in an arbitration agreement. As discussed below, the viability of class action waivers under the National Labor Relations Act (NLRA) remains an emerging issue of law that will confront the Supreme Court of the United States in the near future, but EO 13673 does not affect that analysis.

Confidentiality Clauses

Contractors considering revisions to their arbitration programs should determine whether they need to adjust confidentiality clauses that may impede the reporting of “arbitral awards or decisions” required by the final rules. While the full award itself will not need to be disclosed, the basic details of an award will have to be reported if an arbitrator (or an arbitrator panel) either determines that the contractor violated a labor law covered by the final rules or enjoins the contractor from such violations. Exceptions for disclosures “required by law” would likely suffice to permit contractors to report the details of the findings, but might not authorize disclosure of other information that a contractor may wish to report voluntarily to a contracting agency as evidence of “mitigating information.”

What Lies Ahead for Pre-Dispute Agreements to Arbitrate?

The arbitration restrictions in EO 13673 and the final rules arise in a broader context in which pre-dispute agreements to arbitrate employment-related claims are being attacked. As part of its expansive view of “protected concerted activity,” the National Labor Relations Board (NLRB) has issued scores of decisions holding that the inclusion of class action waivers in arbitration agreements interferes with the exercise of non-supervisory employees’ rights to engage in concerted activity for their mutual aid and protection. The NLRB’s position has generated conflicting rulings in the federal courts of appeal. Despite a few contrary rulings, the vast majority of federal courts to have considered the issue have ruled that the use of class action waivers does not violate employee’s rights under the NLRA. While we await resolution by the Supreme Court, the NLRB’s enforcement position puts federal contractors in an uncertain position. If the Supreme Court adopts the NLRB’s interpretation, contractors charged with unfair labor practices for maintaining class action waivers face the prospect of having to report administrative merits determinations or civil judgments under the final contractor blacklisting rules. At present, three petitions for certiorari on the class action waiver issue are pending before the Supreme Court, seeking review of decisions from the Fifth Circuit (Murphy Oil USA, Inc. v. National Labor Relations Board), Seventh Circuit (Lewis v. Epic Systems Corporation), and Ninth Circuit (Morris v. Ernst & Young, LLP). The Second, Fifth, and Eighth Circuits have permitted the use of class action waivers, while the Seventh and Ninth Circuits have held the maintenance of class action waivers in arbitration agreements violates the NLRA.

In addition to the debate about class action waivers discussed above, legislative and regulatory initiatives designed to limit or eliminate arbitration continue to arise, despite the clear pronouncements from the Supreme Court favoring arbitration. Similarly, aggressive plaintiffs’ lawyers continue to advance both new and previously rejected arguments as to why a given agreement should be invalidated. In short, as long as an arbitration program exists, it will be attacked, and a contractor that wishes to maintain such a program should go into it with its eyes open and be willing to defend it. The weeks leading up to October 25 offer contractors the opportunity to take these considerations into account and ensure their arbitration agreements are framed to best effectuate the contractor’s objectives and navigate the latest legal nuances.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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